The Accounting Expert 

May 2012 Article

Personal Installments

Another personal tax season has come and gone. Most of you will have filed your 2011 returns and paid your tax or received your refunds by now. It may seem hard to believe but an important date for your 2012 taxes is fast approaching. On June 15th you may have an installment payment due.

If you owed more than $3,000 in tax on your 2010 or 2011 returns, the CRA will require you to pay quarterly installments. This usually happens if you are self-employed, if you pay yourself dividends from your corporation, if you have rental or investment income or if you dispose of an asset resulting in a taxable gain.

Clients often ask me if they really need to make these installment payments. The short answer is no but, of course, there is a catch.

If you don’t make your required installment payments and you end up owing money when your tax return is filed next April you will be charged interest from the time the installment was due. That means you will be charged interest even if you make your full payment before April 30, 2013.

That may or may not be a big deal to you. The CRA currently charges 5% on overdue amounts. So if you can take the cash from the installment payment and do something that would earn an after-tax return greater that 5% you might not want to make the installment. I also have many clients that are just not worried about paying that low interest on a small payable balance.

Of course the other thing to keep in mind is that if your 2012 income is going to be less than what you earned in 2011 you can adjust your installment payments accordingly. If you no longer have any of the types of income described above you may even be able to forget about installments completely.

 

 

April 2012 Article

Salary or Dividends?

This is the last of a three part article discussing whether small business owners should take dividends or salary from their corporation. In the first part, we ran through the math and I showed you that there is not much of a difference in total tax. Last month we looked at how paying dividends can adversely affect your CPP and RRSP contributions.  Paying a salary has its own set of issues.

First whenever a corporation pays a salary to a related person (the owner or the owners spouse or children) we always have to consider the reasonableness of the salary in relation to the duties performed. If the CRA determines that a salary is not reasonable they could deny the deduction to the corporation while still taxing the recipient. Now the CRA has taken the position that they would not challenge the reasonableness of any salary paid to an owner who truly active in the business no matter the amount. The problems is the salaries of inactive persons such as the spouse who does a little bookkeeping and promotion. I always tell clients that if they would not pay my spouse the same amount to do the same job then we have a problem. There is no reasonability test for dividends.

The other issue with a salary is just the pain in the butt factor. You have to remember to complete the remittance and pay the withholdings on a salary by the 15th of the following month and do the T4’s in February. If you are out of town a lot or not good at paperwork this can be a problem. With dividends we do a T5 once a year and that is it.

The last thing I want to say about the salary / dividend question is that our decision is never written in stone. We can pay salary or dividends or both and we can change the mix at any time. It all depends on the personal situation of the owners.

 

March 2012 Article

Salary or Dividends?

This is the second part of a three part article discussing whether small business owners should take dividends or salary from their corporation. Last month we ran through the math and I showed you that there is not much of a difference in total tax. But what other considerations might there be?

Well, dividends have two big drawbacks: First dividend income is not eligible income for CPP purposes. That means that if you graduated from high school, started a corporation and paid yourself nothing but dividends, when you turned 65 and applied for your Canada Pension, you would not get one. Second, dividends are not eligible income for RRSP purposes. The amount that you can contribute to an RRSP is based on your eligible income from prior years. Again, if you paid yourself nothing but dividends, you would never be able to make an RRSP contribution.

Now these two issues may not be a problem for you specifically. If you have been an employee either of your own corporation or of somebody else, you will already have built up some CPP entitlement. I also have a number of younger client who are not sure that CPP will be around by the time they want to retire. So instead of paying into the plan they are taking the employer and employee contributions that they would be making and investing them themselves.

As for RRSP’s, many of us have built up RRSP contribution room from previous employments. This means that we can still make RRSP contributions even though we are now earning only dividend income.

We’ll wrap up this series next month with the problem with salaries and some final thoughts.

 

 

February 2012 Article

Salary or Dividends?

Small business owners often ask me if they should be taking dividends from their corporation or paying themselves a salary. There are a few factors to consider in making this decision…but tax usually isn’t one of them. Let me show you what I mean.

Let’s assume that a business  generated net income before tax and owner remuneration in 2011 of $60,000. The owner could take out a salary of $57,782.40 and the corporation would pay the employer’s portion of the CPP on that salary of $2,217.60. So the corporation would have no income and pay no tax. The owner would take the salary of $57,782.40 less the deduction for the employee’s portion of CPP which is also $2,217.60. He or she would pay personal tax on the salary of $11,592.00. The net amount of cash that the owner gets to put in his or her pocket is $43,972.80.

On the other hand, the owner could decide to take a dividend. The corporation would pay corporate tax on the $60,000 which, in Alberta, would be $8,400. This means the owner’s dividend would be $51,600. The personal tax on that dividend would be $3,598. So the cash the owner gets to keep is $48,002.

So by paying a dividend, the owner gets to keep an additional $4,029! But wait a minute. The employee has also earned a pension credit. So that we are not comparing apples and oranges, we should deduct both portions of the CPP which is $4,435.20 from that difference. So really there is about a $406 advantage to taking the salary. And that $406 works out to 2/3 of one percent of the original $60,000. or about 3.5 % of the total tax.

Next month we’ll talk about some other things to think about when making the salary / dividend decision.

 

 

January 2012 Article

If you are planning to purchase a vehicle for your business in 2012 there are some rules which limit the amount that can be depreciated for tax purposes that you should know about. These rules aren’t new but they are often not considered during the purchase process.

The restrictions apply to automobiles that cost over $30,000.

The problems usually arise because the CRA’s definition of an automobile does not always match what you and I would consider an automobile.

According to the CRA an automobile is any motor vehicle designed or adapted primarily to carry individuals and their personal luggage and which has a seating capacity of not more than the driver and eight passengers. Vans and pickup trucks are  automobiles except  in certain circumstances: 1) if the seating capacity of the vehicle is no more than the driver plus two and the vehicle is used at least 50% in the year it is bought to transport goods or equipment; 2) if the vehicle is used at least 90% in the year it is bought to transport passengers, goods or equipment; or 3) if the vehicle is used at least 50% to transport goods equipment or passengers to “special” or “remote work site” locations. (Both of these are specially defined tax terms.)

As always some translation is required. That means that your extended cab truck may be a restricted vehicle unless you use it 90% of the time to transport passengers, goods or equipment. If you originally bought the truck for $50,000 only $30,000 would be added to the Class 10.1 Capital Cost Allowance pool. The remaining $20,000 could never be depreciated for tax purposes.

So before you sign the contract for your new 2012 vehicle, you may just want to check with your accountant first.

 

 

December 2011 Article

Canada Pension Plan Changes

A client recently asked me if he should start taking his CPP when he turns 60 in 2012. I thought that I would take the opportunity to update readers on some changes to the program starting in the new year.

CPP is normally available to Canadians starting at age 65. The maximum benefit in 2011 is $960 per month though the average payment is $512.33.

We have the option of starting to collect our pension as early as age 60 or as late as age 70. The penalty for starting early is changing from 0.5% per month (max 30%) to 0.6% per month (max 36%). On the flip side, the bonus for waiting is increasing from 0.5% per month (max 36%) to 0.7% per month (max 42%).

Prior to 2012, in order to apply for early pension you had to have stopped working (for at least a couple of months). That will no longer be required.

Starting in 2012, if you are collecting CPP and continue to work you will be required to make contributions until you turn 65 and you can optionally continue to contribute until you turn 70.

So should my client take his pension early? Ignoring all factors but the actual payments, there would be an advantage to start collecting at 60 if he plans to expire before turning 74. If he thinks that he will live past age 82 there is an advantage to wait and collect the bonus at age 70.

There are other things to consider in making your decision: Your health (will you be able to enjoy the money at 82?), your other retirement resources (can you live without the money until 70?), and, of course, do you trust the government not to change the rules again (watch what’s happening in Greece and Italy).

 

November 2011 Article

Business Coach

I have a friend who recently bought into a business coaching franchise. The idea of having a business coach has always made sense to me. If professional athletes have coaches, why not professional business people? If professional actors, dancers and musicians can continue to learn things throughout their careers, why not entrepreneurs?

My friend asked me to attend one of his seminars. It was very interesting. The basic premise, as I understand it, is that unless you have built a profitable business that is capable of running without you being there you have really only got yourself a job. The business coach helps you develop ways to stop working in your business and start working on your business. Once you are working on your business you can create the systems and procedures that are really the foundation of a “business” and then you can get the right people in place to run the systems. He used McDonalds as a great example of a business with systems in place that basically let it be run by teenagers. Ronald McDonald now spends all his time clowning around.

I think that the real advantage to having a business coach is having somebody that you are responsible to other than yourself. Most of us business owners are fiercely independent but this has a down-side. There are things that we know we should do and things that we want to do to improve our businesses but there is nobody holding our feet to the fire to make sure we actually do them. The business coach will force you to have a plan and then will follow up with you to make sure you are implementing it.

I, myself, do not have a business coach: I can procrastinate with the best. I think that in theory it is a really good idea and certainly would not rule out getting a coach sometime in the future.

 

 

 August 2011 Article

Letter Campaign Initiative

This month I am passing on an e-mail that registered e-filers have received from the CRA. The CRA calls it information. It sounds to me a lot like intimidation. If you get one of these letters take it to your accountant.

This notice is to inform you that the Canada Revenue Agency will be conducting a letter campaign in an effort to provide Canadians with the information they need to understand their tax obligations. The Audit Division in each tax services office will initiate the campaign in early 2011.

Two types of letters will be sent to Canadians across the country. Some will receive a letter providing information about the eligibility criteria for certain deductions they have claimed on their recent income tax returns. Others will receive a letter with the same information; however, it will also inform them that their income tax returns may be selected for audit.

The goal of the campaign is to educate taxpayers about certain claims made and to promote compliance with the Income Tax Act. We are asking individuals to review their income and expense claims related to rental and/or business activities.We also want to provide taxpayers with the opportunity to amend their income tax returns by completing an adjustment request in cases where the taxpayer may have claimed deductions in error or provided inaccurate information. Requests for adjustments can be made online by accessing My Account or Represent A Client, if you are authorized to do so, or by mail using Form T1-ADJ, T1 Adjustment Request, which is available on our Web site at www.cra.gc.ca/forms.

Something to keep in mind while completing your 2010 personal tax returns.